Summary: Household sentiment deteriorates modestly in February; decline in index a surprise given easing Omicron disruptions, improved labour market; touch under long-term average reading; improvements from falling infection, hospitalisation rates “more than offset by increased pressure on family finances”; three of five sub-indices lower; Unemployment Expectations index lower, points to jobless rate falling below 4% over next few months.
After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again in mid-July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery.
According to the latest Westpac-Melbourne Institute survey conducted in the first week of February, household sentiment has again deteriorated modestly. Their Consumer Sentiment Index declined from January’s reading of 102.2 to 100.8, ending a run of slightly-above average readings.
“Given that the health disruptions from the Omicron variant have eased and the labour market has strengthened it is surprising that we did not see some improvement in the Index in February,” said Westpac Chief Economist Bill Evans.
Any reading of the Consumer Sentiment Index above 100 indicates the number of consumers who are optimistic is greater than the number of consumers who are pessimistic. The latest figure is a touch under the long-term average reading of just over 101.
Domestic Treasury bond yields declined modestly on the day despite moderately higher US Treasury yields in overnight trading. By the close of business, the 2-year ACGB yield had slipped 1bp to 1.59%, the 10-year yield had lost 2bps to 2.12% while the 20-year yield finished 1bp lower at 2.60%.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.05%, softened a little with respect to rate rises in the second half of 2022. At the end of the day, contract prices implied the cash rate would rise gradually from the current rate of 0.050% to 0.14% by May, then increase to 0.555% by August and then to 1.37% by February 2023.
Evans noted improvements related to falling infection and hospitalisation rates have been “more than offset by increased pressure on family finances.” He attributed these pressures to Omicron-related disruptions to household earnings at the start of the year, rising prices and the expectation of higher interest rates.
Three of the five sub-indices registered lower readings, with the “Family finances versus a year ago” sub-index posting the largest monthly percentage loss. Readings for the sub-indices “Economic conditions – next 12 months” and “Economic conditions – next 5 years” both improved.
The Unemployment Expectations index, formerly a useful guide to RBA rate changes, fell from 112.7.1 to 102.8. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.
“Unemployment expectations have been a good indicator of the unemployment rate during the pandemic and points to the risk of the unemployment rate falling below 4% over the next few months; the RBA currently has this pencilled in to occur in Q3 2022,” said NAB senior economist Tapas Strickland.